29 Percent Refinance to Shorter Term

By Peter King,

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Nearly one-third of homeowners who refinanced their mortgages in recent months chose to accelerate the date when their loan would be paid off, according to new figures from Freddie Mac .

Of all homeowners who refinanced Freddie Mac-backed mortgages in the third quarter of the year, 29 percent chose a new mortgage with a shorter loan term than their current one, such as replacing a mortgage with 23 years left on it with a 15- or 20-year fixed-rate loan.

The vast majority, 68 percent, chose to stay with their same loan term as before, while 3 percent chose to stretch out their payments.

Historically low mortgage rates, along with a substantial difference in interest rates between 15- and 30-year fixed-rate mortgages have made shorter-term mortgages an increasingly popular option for refinancing.

"Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about 0.7 percentage points lower during the third quarter," said Frank Nothaft, Freddie Mac chief economist." For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, a shorter-term, fully amortizing loan reduces the loan balance faster and builds home equity sooner."

HARP Refinancers Opt for Longer Terms

Homeowners who refinanced through the government's Home Affordable Refinance Program (HARP) were slightly more likely to stick with a long-term mortgage rather than choosing to shorten their mortgage term. Just 25 percent of borrowers who refinanced through HARP chose to shorten their loan term, compared to 31 percent of non-HARP refinances.

Virtually all borrowers who refinanced adjustable rate mortgages (ARMs) through HARP during the third quarter of the year chose to refinance into fixed-rate mortgages, with 95 percent choosing that option. By contrast, about one-half of homeowners who refinanced ARMs outside of HARP during that time chose to stay with an adjustable-rate loan.

About 83 percent of those refinancing primary mortgages during the third quarter of 2012 either reduced or maintained their current mortgage balance, leaving only a small percentage of "cash-out" refinances where homeowners used a refinance to borrow against their home equity. Borrowers reduced their balance owed in 29 percent of all refinances in the third quarter.

The figures are based on Freddie Mac's own figures for refinanced mortgages it guaranteed during the third quarter of 2012.

First published on MortgageLoan.com at: http://www.mortgageloan.com/29-percent-refinance-shorter-term-9295

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance Banking and Loans
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